The credit card ABS sector was reshaped in 2009 by a confluence of credit, funding, legislative, regulatory, and accounting challenges.Consumer credit quality deteriorated throughout the year, driven by a prolonged and severe economic downturn, rising unemployment and a lack of credit availability for consumers. As a result, Fitch's chargeoffs and 60+day delinquency indexes reached record highs during the year and remain elevated.

From a funding perspective, the launch of TALF helped alleviate some challenges and coaxed the return of traditional investors to senior tranches. Also, pending implementation of SFAS 166 and 167 cast uncertainty over the economics of funding through the ABS markets going forward and called into question the Federal Deposit Insurance Corp.'s treatment of bank sponsored securitizations in the event of conservatorship or receivership for a short while. On other fronts, the U.S. Congress swiftly enacted legislation aimed at curtailing the use of certain risk based pricing practices.

In the face of these challenges, issuers were forced to make tough choices regarding their commitment to existing credit card business models and the continued use of ABS as a funding source. Upon affirming that commitment, several of the largest credit card ABS issuers chose to mitigate credit deterioration and the risk of early amortizations as well as potential downgrades by shifting collateral composition and implementing structural enhancements. For the most part, those efforts have helped offset the declines in credit quality, preserve ratings, and restore confidence in the market.

While the benefits have been encouraging for investors, many have questioned what would have happened had issuers not taken such actions. Fitch, in response, worked towards answering those questions by analyzing the impact on stress multiples, along with likely and actual rating actions for three of the largest Fitch-rated master trusts: Bank of America (BofA), JPMorgan Chase and Citibank. These trusts were chosen since the actions taken on them had the largest impact on performance and they generated the longest periods of observation.


-Fitch's likely rating actions (downgrades) would have been limited to one master trust, BofA;

-The magnitude of those actions would have been one category for senior tranches and potentially two categories for the most subordinate classes;

-Absent discount options being implemented, none of the trusts would have triggered early amortization by this point in time. Three-month average excess spread would have remained above 0% for all trusts;

-While pressure on chargeoffs remains, an increase to levels between 30% and 45% would be required before any senior tranche defaulted.

Issuer Actions:

In an effort to stem the credit deterioration, issuers undertook proactive measures to enhance collateral composition and performance measures and provide additional support to preserve ratings.

-Discounting receivables;

-Increasing credit enhancement levels by adding new subordinated tranches;

-Increasing overcollateralization and strengthening spread accounts;

-Re-pricing portfolios, boosting spreads, instituting pricing floors, increasing penalty fees;

-Cutting back originations, limiting balance transfers;

-Reducing credit lines;

-Removing riskier cardholders from trusts, for trusts where non-random removals are permitted ;

-Adding higher quality cardholders to trusts.


Likely Rating Actions

Fitch is allowing for some multiple compression in the current environment. Compressed multiples do not automatically trigger a downgrade. Rather, when reviewing the performance of an existing transaction, Fitch considers the current and expected economic environment, the strength of the servicer, and structural features of the specific transaction. Also, for tranches supported by spread accounts, the velocity of excess spread declines and amounts previously trapped would be considerations.

As Fitch makes allowances for multiple compression, rating actions are more likely to appear in rapid succession than they would under more benign economic circumstances.

Listed below and shown in the charts at right are the likely rating actions Fitch would have taken if no changes to available credit enhancement had been made.


BofA - Likely Rating

Actions with No Changes 'AAA'

-Placed on Rating Watch Negative in May 2009;

-Downgraded to 'AA' and remained on Rating Watch Negative in July 2009.


-Placed on Rating Watch Negative in May 2009;

-Downgraded to 'BBB' and removed from Rating Watch Negative in July 2009. 'BBB+'

-Placed on Rating Watch Negative in April 2009;

-Downgraded to 'BB' and removed from Rating Watch Negative in June 2009;

-Downgraded to 'B' in August 2009.


Citibank - Likely Rating

Actions with No Changes'AAA'

-Outlook revised to Negative from Stable in April 2009.


-Outlook revised to Negative from Stable in April 2009.


-Placed on Rating Watch Negative in April 2009.

Chase- Likely Rating

Actions with No Changes 'AAA'



-No actions.

Full report is available on

Michael Dean is a managing director and head of Fitch's U.S. cnsumer ABS group.

Cynthia Ullrich is a Senior Director in Fitch's U.S. ABS group.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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